El-Erian Speaks: Economy Will Slow Dramatically In The Second Half Of 2010

Now I will tell you how it was, how it is, and how it will be.
Heidi Moore Lauren Young caught up with Mohammed El-Erian over at CBS Moneywatch. The full interview is here.

Here are his key points:

U.S. could go to levels that are no longer compatible with a triple A rating.

The yield on the benchmark 10-year U.S. Treasury bond will bounce around between 2.75 percent to 5 percent until the end of 2011.

What's happening in Greece, as well as in Dubai last year, is part of a much bigger sovereign debt phenomenon that is going to impact virtually every market in the world.

The percentage of countries with budget deficits that amount to more than 10 percent of their GDP has been in the 0 to 5 percent range for the past 30 years... Today the situation is very, very different. Countries with really high deficits amount to over 40 percent of global GDP, and this number is dominated by advanced economies, including the U.S. and U.K.

Greece is the most vulnerable country in Europe. Portugal is next, followed by Spain. The least vulnerable country is Germany. The U.S. comes in the middle.

Unfortunately, it is hard to see an adjustment process that does not provide yet another headwind to growth...This will dampen the prospects for high returns for riskier assets, including equities.

Look for [US] growth rates to be an annualized 4 percent to 5 percent in the first half of the year. Growth will likely slow in the second half to an annualized 2 percent.

In 2011, investors will need to start thinking about inflation protection.

Be careful of overloading on U.S.-based investments. You want to be global when it comes to bonds as well as equities.

The most interesting segments of the global bond markets include local currency bonds in Brazil, select high-quality U.S. corporates, emerging markets external bonds, several Build America Bonds.